Will Banks Fill Leasing Void?

The nation's top-selling Chrysler-brand dealer, who depends heavily on leasing to move the metal, expects banks to fill the void left when Chrysler Financial abandons leasing, effective Aug. 1.

Meanwhile, dealers tell Ward's Chrysler, in lieu of leasing, plans to offer 0% financing for up to 72 months, with varying levels of cash incentives, including $4,000 for slow-selling pickup trucks.

Dan Frost, owner of four dealerships including the top-seller Southfield Chrysler Jeep in Southfield, MI, says leasing comprised 95% of that store's 6,262 vehicle deliveries last year.

About 65% of those were through Chrysler Financial; the rest through financial institutions such as Fifth Third, Wells Fargo, Marshall & Illsely and Chase Manhattan.

Although Chase Manhattan says it no longer will offer leases on Chrysler-brand vehicles, Frost believes other banks will step up because they want the lease business.

“They've got all this money sitting there, the deposits they are paying interest on, but they have nowhere to put the money,” he says, referring to a reduction in mortgage lending.

“So, they want to do some short-term leases to get rid of the money until this mortgage stuff settles down. They've got to do something with the depositors' money.”

Frost says that before the Aug. 1 cutoff, his stores were “flooded with people turning in leases to get new 3-year leases, so they don't have to deal with a short-term result.”

On July 28, he sold about 75 vehicles at his Southfield store and 50 at his Telegraph Chrysler Jeep dealership in Taylor, MI. “It was a big sales day,” he says.

Frost agrees with some customers who say, “Give it a year and Chrysler (LCC) will be back into the leasing market.”

“SUVs and the pickups are taking such a dump at auctions that they've had to stop leasing to get themselves balanced again,” he says. “They will get this portfolio rearranged and then they'll arrange their residuals by the proper percentages for what's going through at auction.”

Automotive Lease Guide says market values of fullsize SUVs have fallen from as much as 45% as a percentage of suggested list prices last year to 30% this year on the Chevrolet Suburban and 32% on the Ford Expedition.

By contrast, according to the Guide, the Honda Fit subcompact's market value has risen to 56% of the suggested list price, while the Toyota Yaris is up to 50% and Chevrolet Aveo at 42%.

Despite what is shaping up to be a lousy sales year for the auto industry, Frost remains optimistic things will get better.

In about six months, as the high price of oil falls and the mortgage crisis settles down, consumers will start feeling confident again, he says. “They'll be back out in large numbers buying cars.”

The main reason Chrysler Financial is getting out of leasing is because it's having a difficult time getting secondary finance companies to buy the paper on leases, Frost says.

Jim Press, Chrysler vice chairman and co-president, told analysts last week Chrysler is focusing on the 80% of the market in which vehicles are purchased vs. the 20% leased.

Press, a Toyota Motor Sales U.S.A. Inc. alumnus who never faced leasing saturation problems at the Japanese brand, says Chrysler would seek to re-channel customers from leasing to lending.

Chrysler Financial's leasing pullout is not going to be an issue for “big” dealers, Frost says.

Chrysler-brand dealers with little leasing business see the financing arm's no-leasing decision as an opportunity to gain business.

“It's going to be good for our store,”' says Wes Lutz, owner of Extreme Dodge Hyundai in Jackson, MI.

Duane Schultz, owner of a Chrysler-Dodge-Jeep dealership in Milan, MI, says his store leases 70% new vehicles, mostly through Chrysler Financial. Whatever replacement incentives Chrysler comes up with to make loans as desirable as leasing “better be darn good,” he says.

Some other domestic-brand dealers fear their auto makers' financing arms will follow Chrysler Financial's lead. GMAC's announced cessation of leasing in Canada heightens that fear.

National Automobile Dealers Assn. Chairman Annette Sykora, who runs a Chrysler-Dodge-Jeep store near Lubbock, TX, says she hopes “the resilient dealer body will find solutions for the problems caused by the absence of leasing as a vehicle sales tool.”

Her Chrysler store does “a small amount of leasing,” she says. “But we in NADA leadership are keenly aware of the impact this move will have on an already challenged market. Dealers who do as much as 70%-80% leasing could be hard hit.”

Banks that haven't done much leasing may “step in now that Chrysler is out of leasing to help their dealer clients out,” Sykora adds. “I'm confident the Chrysler dealers, who have gone through many ups and downs, can ride this out.”

Bob Feeny, owner of Chrysler-Dodge in Midland, MI, and Chrysler-Dodge-Jeep in Gaylord, MI, says his leasing rate has been 56%. “We'll have to find replacement lessors, but I'm not pessimistic about the future.

“Folks still need cars, and maybe they'll return to the days when they owned them outright,” he says. The advantage to that is “not having to turn them over to a lender after three years and give away the residual.”

A domestic-brand dealer, who asked not to be named, says captive lenders are paying the price for over-inflated residual predictions that hurt them in trade-ins and remarketing off-lease vehicles.

“They can recover with low or no-interest long-term loans that will reduce their risk later on,” he says. “And I fully expect them to do so.”

An executive of a publicly owned dealership chain says, in retrospect, he should have seen Chrysler Financial's no-more-leasing decision coming.

He says a few days before the announcement a repeat customer with near-perfect credit wanted to lease a Chrysler vehicle for her business. Chrysler Financial turned her down.

“She ended up going across the street and leasing a Honda instead.”
— with Mac Gordon and Cliff Banks.